The Half-Life of Policy Rationales

Bryan Caplan recently wrote about public goods theory, how we teach it, and the unrealistic nature of how we classify goods as either/or, rather than on a continuum. I explored similar themes in a blog post that I wrote back in January, but Caplan brings up another important point about public goods theory that I forget.

In a short 2002 paper, and then in a 2003 book with the same title, Foldvary and Klein proposed the idea of “the half-life of policy rationales.” In brief, the justification for many market failure arguments is contingent on the current state of technology. They apply this to concepts such as natural monopoly and information asymmetries, but for public goods theory the most important application is to the concept of excludability.

Here’s the basic idea: it is costly to exclude non-payers for using some goods. If it is so costly that it would not be profitable for a private enterprise to produce the good in question, it won’t be produced privately. But it still may be efficient for government to produce the good, if the benefit from the good exceeds the cost of raising the revenue to pay for it (likely out of general revenue, since we have already admitted it is infeasible to charge the users directly).

But here’s the Foldvary and Klein point: all of the above paragraph is dependent on the current state of technology! Take roads for example. When you had to pay someone to physically take a few coins for a toll road, plus force all motorists to slow down to a complete stop to pay the toll, it was probably cost prohibitive to operate limited-access private toll roads. But technology changes. We now have the technology for electronic tolling done at highway speed (and even coin buckets were slightly faster than handing some dude your change). The argument for government provision of highways, which was strong when technology was ancient, is significantly weakened now that technology has reached its modern state.

(There may be lots of other reasons you think that roads should be publicly provided, such as equity, but these are separate questions and distinct from the argument made in standard public goods theory.)

Foldvary and Klein go through many more examples in their book, but we can already see the key insight. And I think this is extremely important for teaching public goods to undergraduates. It’s normal for us to say that goods are either excludable (in which private provision is best) or non-excludable (in which there is a strong case for some government intervention). But this either/or framing is wrong (a continuum is a better way to think about it), and crucially it can change over time depending on technological changes. Excludability is not some inherent feature of a good or service, it is a function of the state of technology.

How Should We Teach Public Goods Theory?

Joshua Hendrickson recently wrote about the provision of public goods, and how we teach public goods in economics. My post today is not so much a reply to Hendrickson, but is inspired by his mediation on public goods as I gear up to teach another semester of Public Finance.

The theory of public goods that economists discuss among themselves is pretty straightforward: when a good is both non-rival and non-excludable, there is a strong case for government intervention of some sort (though not necessarily public provision). The opposite is true when a good is both rival and excludable: there is a strong case for laissez faire.

Seems simple enough, right? But communicating this concept to undergraduates and the general public has been a major challenge. Part of the confusion arises from the term itself, “public good.” Non-economists tend to use the term interchangeably with the notion of “the common good, as is clear from Wikipedia, a dictionary, or a conversation with your grandma. For this reason, I sometimes substitute the awkward phrase “collective consumption good” (this is actually Samuelson’s term in his classic article on the topic), but all the textbooks so use it so I often default to the standard terminology.

From Jonathan Gruber’s Public Finance and Public Policy

But I think there’s a deeper problem than just terminology. Economists have put themselves in a box. Literally. Here’s a standard 2×2 matrix from Jonathan Gruber’s undergraduate public finance textbook. I don’t mean to pick on Gruber here — this is a pretty standard presentation. You can find it in many microeconomics textbooks too, or on Wikipedia. Everything goes in a box! It’s a nice stylized way to think of the terminology. It makes for nice test questions. But here’s the real problem with it as a pedagogical tool: it doesn’t seem to help many students! Or at least, it doesn’t seem to help them retain the knowledge between their micro principles courses and upper division courses (at least in my experience, I’d be happy to hear others chime in here).

So how can we teach this concept better? I have a few ideas. I’d like to hear yours too.

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